The Mosaic Company (NYSE:MOS) Q1 2023 Earnings Call Transcript May 4, 2023

The Mosaic Company misses on earnings expectations. Reported EPS is $1.14 EPS, expectations were $1.29.

Operator: Good morning, and welcome to the Mosaic Company’s First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Your host for today’s call is Paul Massoud, Vice President of Investor Relations and FP&A of the Mosaic Company. Mr. Massoud, you may begin.

Paul Massoud: Thank you, and welcome to our first quarter 2023 earnings call. Opening comments will be provided by Joc O’Rourke, President and Chief Executive Officer; followed by Q&A. Clint Freeland, Senior Vice President and Chief Financial Officer; and Jenny Wang, Senior Vice President, Global Strategic Marketing, will also be available to answer your questions. We will be making forward-looking statements during this conference call. The statements include, but are not limited to, statements about future financial and operating results. They are based on management’s beliefs and expectations as of today’s date and are subject to significant risks and uncertainties. Actual results may differ materially from projected results.

Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release published yesterday and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our press release and performance data also contain important information on these non-GAAP measures. Now I’d like to turn the call over to Joc.

James O’Rourke: Good morning. Thank you for joining our first quarter 2023 earnings call. Mosaic delivered revenues of $3.6 billion, adjusted EBITDA of $777 million and adjusted earnings of $1.14 per share. The fundamentals of the agriculture market remain quite attractive. Global stock-to-use ratios for grain and oilseeds are at 25-year lows. To put that in context, it would take 2 to 3 years of perfect weather and adequate fertilizer applications in every major growing region around the world just to get back to normal levels. With weather patterns shifting to an El Niño environment, the likelihood of that happening is low and would be exacerbated by under fertilization. We are beginning to see the negative impacts on crop production.

Yields in the European Union turned lower in 2022 because of poor weather and under fertilization and will remain under pressure this year if fertilizer applications remain down. We’re seeing a similar story in rice. The combination of El Niño and under fertilization could further threaten yields in key growing regions. With reduced supply of sunflower seed oil because of the ongoing war in Ukraine, the global market needs alternative edible oils and is looking to palm oil as an important substitute. Lack of fertilization, particularly potash, will impact Southeast Asian production. All of these factors are expected to support global crop prices for the foreseeable future. Switching to fertilizer markets, farmer affordability for phosphates and potash globally is very good with prices that are much more sustainable than the levels we saw a year ago.

This is bringing growers back into the market, though supply constraints are still a concern. In potash, Belarusian exports remain limited because of sanctions. We’ve seen volumes move by rail into China and, to a lesser extent, through excess Russian port capacity, but transportation costs are high, and total exports remain well below pre-sanctioned levels. This year, we expect total exports from Belarus to be roughly 7 million tonnes. In addition, we also continue to see indications of reduced Russian product as well. It is clear that today’s potash market is tight and supply chain is under pressure, but this extends beyond just Belarus and Russia. This vulnerability is highlighted by the recent failure of the walkway on a conveyor Canpotex 4 million tonne per year Portland terminal.

Canpotex is still assessing the total damage, but expects to redirect much of the lost volume to other North American ports, albeit at some additional cost. In Phosphates, China remains committed to a structural shift away from exports. While it’s possible to see a modest increase in exports over the 2022 total of 6.4 million tonnes. Domestic fertilizer demand, rising industrial consumption and environmental restrictions will cap China shipments to other markets. These supply constraints remain even as demand in our key customer markets is seeing a recovery. In North America, spring planting season is well underway, and farmers have returned to the market, though retailers have been slow to adjust their prices to global wholesale market prices.

Despite that resistance, growers are still committing and taking tonnes. Retailers are replenishing their inventories. In April, Mosaic’s volumes saw a significant rebound in the North American shipments for both potash and phosphate. Combined, Mosaic shipped over 1 million tonnes of potash and phosphates to North American customers in April alone. This is the highest total we’ve seen in the last 5 years. In Brazil, the is supportive of demand, and we expect commitments for the third quarter to ramp up with prepays for fertilizer ahead of the softer season. We expect Brazil will see a 9% to 10% increase in fertilizer shipments in 2023 over last year. In India, inventories for potash remain depleted as all purchases are going straight to the ground.

After a year of reduced potash applications, a potash contract was signed in April at a price of $422 per tonne. In addition to providing necessary supply to Indian farmers, the contract helps stabilize global pricing. In Southeast Asia, with the shortfall in edible oils globally, the palm market is driving strong demand. Globally, we’re seeing good farmer economics, which suggest strong demand for phosphates and potash in 2023. Given this landscape, we believe our business is well positioned to benefit from today’s market conditions. In Phosphates, after 2 years of production issues caused by multiple hurricanes, raw material shortages and other issues, the segment’s performance has improved. Volumes during the quarter were higher than any quarter in 2022, and our stripping margins also benefited from lower raw materials costs.

We expect both of these trends to continue in 2023. In the second quarter, we anticipate total sales volumes of 1.8 million to 2 million tonnes with DAP FOB prices at the plant in the range of $550 to $600 per tonne. In Potash, volumes began to move over the last week of the first quarter, and that has continued into the second quarter, especially in North America. We expect demand to continue recovering throughout the year. Our operations at Esterhazy and Belle Plaine are performing well. Esterhazy is one of the most efficient mines in the world, and Belle Plaine should see benefit from lower natural gas costs in 2023. At Esterhazy, the last of the 13 miners is expected to come online later this year. In total, Esterhazy’s annual operational run rate should increase from 5.5 million tonnes last year to well over 6 million tonnes by the end of 2023.

We’re committed to producing enough potash to meet market demand. With the incremental output from Esterhazy, we believe we’re producing what the market needs, which means we’ll only restart Colonsay when it’s needed. We don’t think this will be before the second half of the year. In the second quarter, we expect total sales volumes of 2 million to 2.2 million tonnes with MOP prices at the mine in the range of $325 to $375 per tonne. In Brazil, first quarter results reflected the impact of declining prices and inventory destocking. As we said in February, we expected our Q1 results to be impacted by destocking of high-priced inventory. And now that is largely behind us. Looking ahead, we expect distribution margins to trend back towards the range of $30 to $40 a tonne.

In the second quarter, 90% of those tonnes are already committed and priced. Finally, I want to reiterate that we are committed to our capital allocation strategy of maintaining a strong balance sheet, investing in our business and returning capital to shareholders. We’ve met our commitment of reducing long-term debt by $1 billion. As such, we expect to refinance the $900 million that matures later this year. Our CapEx spending expectation this year remains unchanged at $1.3 billion to $1.4 billion. We’re focused on high returning modest spend projects like our distribution facility in expansion of MicroEssentials at Riverview and the exploration of purified phosphoric acid. Beyond that, all excess free cash flow will be returned to shareholders through dividends and share buybacks.

During the quarter, we returned $608 million, which included $456 million of share repurchases and $152 million in special and regular dividends. Over the last 18 months, we’ve repurchased 15% of our float and still believe our shares represent very good value. Our regular dividend today is $0.80 per share, and our business positions us to consider further increases over time. Before we move to the Q&A, let me summarize. The global ag market remains constructive. Grain and oilseed supplies are tight, and growers are incented by favorable economics to apply nutrients. We are already seeing the recovery in shipments in North America and expect the rest of the world to follow. Our production operations are performing well. Phosphate production has recovered, and potash is benefiting from the most efficient mines in the world with swing capacity available to meet demand growth.

Our balance sheet is strong and sustainable over the long term, and we remain committed to returning significant capital to shareholders while continuing to invest efficiently in the business. With that, I’d like to move on to the Q&A portion of the call.

Paul Massoud: Before we move on to live Q&A, as we’ve done in past quarters, we’d like to address some of the most common questions we received after we published our earnings materials last night. Joc, the first question that we received was, how do we see ag markets evolving over the rest of 2023?

James O’Rourke: Thank you. While there has been recent volatility in the agricultural markets, the fundamentals remain strong. We’re starting with a 25-year low stock-to-use ratio for grains and oilseeds. Now much has been made of Brazil’s larger-than-expected crop, but offsetting that is problems in the Argentinian, Europe, Asia and others who are suffering from lower yields due to weather and under fertilizations. Then as we look at going forward, this year’s El Niño and under fertilization brings up a real risk to the 2023 ag markets. Now weather is always a known uncertainty. But as we’ve seen in recent past, extreme weather events that negatively impact ag production seem to have become more commonplace. Longer term, we do continue to see great potential for demand growth from biofuels, including an increased call on oilseeds to feed renewable diesel production as well as the enormous potential for sustainable aviation fuel.

We also believe that biofuel use will continue to rise in the medium term even as cars transition towards electrification. To sum up, there is a rational basis for ag commodity prices to have eased off in recent weeks. However, there is strong fundamentals for ag bullishness .

Paul Massoud: Joc, a follow-on to the ag markets question. How do we see what you just said impacting fertilizer markets over the rest of this year?

James O’Rourke: Well, thank you. I’d like to start by saying what we’re seeing in North America demonstrates just how strong the market could be this year. If we look at North America in the months of March and April, those were both very strong months and up about 20% from where we were probably last year. So if I look forward there, I expect that will carry over to a stronger season in Brazil once the application gets started, and then it will continue for Asia and other regions. Now I’m going to turn it over to Jenny to give a little more detail on the supply and demand of the fertilizer markets.

Jenny Wang: Sure, Joc. Let me start from phosphate. The export control out of China is going to continue as the country is going through phosphate industry shift from production on fertilizers to industrial products. The Chinese government is going to continue to ensure their farmers to have affordable and available fertilizers in country for their own production. The export restriction is going to continue to be in place. We believe this year, the export out of China will be somewhere between 7 million to 8 million tonnes. With the tight supply of phosphate and the rebounding demand, we believe this is a very constructive margin environment for phosphate. Turning over to potash. Export out of Belarus last year had significantly reduced from 12 million tonnes to 5 million tonnes.

This year, despite multiple export corridors being utilized by Belarus, we still don’t believe that they have opportunity to export over 8 million tonnes out of Belarus. And the production out of Russia is continuously under the risk. On the demand side, as Joc mentioned, we are seeing a very strong spring season in North America. In the market when spring application have started, we’re seeing a bigger volume and we have seen price appreciation in the market. And in the market in Northern plants, where the spring season are still ongoing, we have started to get inquiries from our customers for their summer fuel demand. This demand to summer fuel and applications are indicating a strong and robust demand for the full season in North America.

We believe what is happening in North America is going to happen in a market like Brazil, where they are going to prepare for their incoming seasons, and we believe they will engage soon. With strong demand in Asia, we believe the buyers will reengage and the price and volumes will respond positively.

Paul Massoud: Thank you, Jenny. The next question is a follow-on to what we just talked about. Given this constructive outlook on the fertilizer markets, can you explain your thinking behind the guidance for pricing and volume, particularly for Potash?

James O’Rourke: Thank you. In Potash, we guided to a normal quarter in North America and a conservative view of the export market. Early quarter demand in North America is stronger than we would have expected and certainly stronger than normal. And history would say that the strong North American market will be followed in other markets such as Brazil and Asia. If this occurs, there is certainly upside to both potash volume and price. We have seen over and over again that once volumes move, price follows.

Paul Massoud: Joc, our next question is on Mosaic results. Could you provide more color on the quarter and how you see the performance of the segment evolving over the rest of the year?

James O’Rourke: Thank you. In the distribution business, the lead time to position products is quite long. As such, when the second half volumes were lower than we expected, we ended the year with high-priced inventory. Now we have sold most of this higher cost inventory down and expect the rest of the year to be much more normal. Transitioning between cycles can temporarily expand or contract margins, but true cycle margins remain unchanged. For example, in quarter 4 of 2022 and quarter 1 of 2023, distribution margins were below historic levels, but they will return as market stability is achieved. Distribution margins in second quarter to the fourth quarter will be in the $30 to $40 range when averaged together.

Clint Freeland: Joc, one other thing that I would note that I think is important in this discussion is that we use average cost accounting for the cost of inventory in Brazil. And what that means is that as prices — sales prices are moving either up or down, the average cost of inventory that we’re recognizing in our results is moving a little slower than that market price. And as a result, during increasing price environment, you’ll see expanding margins. During declining price environment, you’ll see declining margins. But that’s why over the course of the year, we will see margins in the target range that we’ve talked about. But quarter-to-quarter, as market prices are moving, you can see a level of volatility in results.

Paul Massoud: Thank you, Joc, Clint and Jenny. Operator, let’s move on to the live portion of the call.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from Christopher Parkinson from Mizuho.

Operator: Our next question comes from Steve Byrne from Bank of America. .

Operator: Our next question comes from Ben Theurer from Barclays.

Operator: The next question comes from Andrew Wong from RBC Capital Markets.

Operator: Our next question comes from Joel Jackson from BMO Capital Markets.

Operator: Our next question comes from Richard Garchitorena from Wells Fargo.

Operator: The next question comes from Edlain Rodriguez from Credit Suisse.

Operator: [Operator Instructions]. Our next question comes from Joshua Spector from UBS.

Operator: Our next question comes from Jeff Zekauskas from JPMorgan.

Operator: Our next question comes from Vincent Andrews from Morgan Stanley.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Joc O’Rourke for any closing remarks.

James O’Rourke: Okay. Thank you, everyone. Let me conclude our call by reinforcing a couple of our key messages. The agricultural commodity prices are still elevated. This gives farmers strong incentive to maximize their yield and use fertilizers. So fertilizer demand is robust and volumes are starting to move quite strongly. Our operations are running well, and our strong earnings and cash flow are allowing us to return significant capital to shareholders. 2023 is off to a good start for Mosaic, and we have a positive outlook for the remainder of the year. So with that, thank you for joining our call. Have a great and safe day.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.